In Case You Missed It: Biosensors’ Yoh-Chie Lu on China as a Source of Medtech Capital

Conventional wisdom has held that medtech companies could only be successful if they were willing and able to tackle the US market, but two decades ago Biosensors International built an extremely successful interventional cardiology business by bypassing the US to target Japan and, at the time, a nascent Chinese market. We share an excerpt from David Cassak’s conversation with Biosensors’ former CEO Yoh-Chie Lu.

Introduction

The rapid growth of China over the last decade has introduced a competitor to the notion of US exceptionalism. Though the US market is still the largest medtech market in the world and though China presents challenges—protecting IP, for example, and pricing—increasingly US and ex-US companies are wondering whether China, backed by an eager VC community, isn’t a good place to start—and perhaps even better than the US.

Such a notion might make for an interesting discussion, mostly theoretical, but two decades ago, one company, Biosensors International Group Ltd., built an extremely successful interventional cardiology business by doing just that: bypassing the US market in favor of a strategy that targeted Japan and, at the time, a nascent Chinese market. Many years later, that strategy has paid off handsomely. In the July 26 issue of MedTech Strategist, Biosensors founder and long-time CEO Yoh-Chie Lu spoke with David Cassak about the company’s success, about its efforts in Japan and China, and about where the Chinese medtech market is today (read the complete interview at “Finding Success in China: The Biosensors Story,” MedTech Strategist, July 26, 2018). In the following excerpt, Cassak and Lu discuss China’s growing clout as a medtech investor.

Q: A lot of small companies in the US, particularly as US venture capital has retrenched, are looking to China as a source of capital. And we seem to see Chinese investors at dozens of conferences, looking for deals. Do you think that the hope that Chinese investors will step in and fill the gap left by US investors is a realistic one? And if so, do you have any insights for small companies about the difference between taking capital from a Chinese investor, or maybe even a Singapore investor, and a US investor?

I’ve seen several cases of US medical device companies going to China to raise money and coming back with a sufficient amount to run their companies. So it is possible. But you have to diligently look for the right partner, one that not only likes your technology but is willing to work with you. Most of the time, those investors will require the company to manufacture in China and give them the right to distribute the product there. That way, it’s a win-win. But you have to carefully negotiate that. If US companies are willing to accept those terms, I think it’s possible that we’ll see more money available from China than from US investors today.

Q: You hear a lot of talk that Chinese investors are so new to the game and so eager to invest that they may not be as valuation-sensitive as US VCs. Do you think that’s true or is that wishful thinking on the companies’ part?

Two or three years ago, I think it may have been true that Chinese investors were naïve, but they’ve learned very fast. Today I think they’re sometimes tougher than American VCs.

Two or three years ago, I think it may have been true that Chinese investors were naïve, but they’ve learned very fast. Today I think they’re sometimes tougher than American VCs. They’re very smart.

In the end whether you’re in the US or in China, everything is driven by relationships, and by who you know. Today, many successful Chinese VCs have representatives in this country, and they’re all very active looking for deals. And like all VCs, everyone is just trying to make as much money as they can on each deal and not lose any money.

Q: So if you’re a small company, pitching to VCs, and you’ve got two term sheets, one from a Chinese investor and one from a US investor and they’re equal in their terms, how would you advise that small company about which investor to choose?

I’ve seen companies take the Chinese money because the investor will help them later get into the Chinese market—you cannot do it without a partner.

That’s a hard question. I’ve seen companies take the Chinese money because the investor will help them later get into the Chinese market—you cannot do it without a partner. There might be a slight advantage there. That means Chinese investors sometimes are more patient. In the US, VCs only ask for milestones, and if you miss a milestone, they’re reluctant to invest in the next round. But a Chinese investor might have more incentive because there’s a benefit down the road. But it’s hard to say. All I can say for sure is that we’re seeing more and more companies showing an interest in taking Chinese money.

Q: Several years ago, I was having a conversation with a Chinese venture capitalist and at the time, I was asking about her interest in biotech, not medtech. I asked if she were targeting biotech and she said that given the size of the Chinese market, she could make a fortune producing shopping carts. Why would she want to get involved with anything as risky as biotech?Has that attitude changed in China? Is there now an appetite for riskier, higher tech devices?

Definitely, because the competitive picture is different. Anybody can make shopping carts, but medical devices are going to have a longer life and much higher barriers to entry for other companies. The Chinese are very, very clever, and they’ve learned quickly how to do medtech.

If you look at meetings like the JP Morgan meeting, four or five years ago, you’d see only a handful of Chinese investors attending. This year, I’d say 30-40% of the attendees were Chinese. That shows they’re interested in what’s going on and they have the appetite to invest.

The Chinese are very, very clever, and they’ve learned quickly how to do medtech.

Q: Let’s talk about the flip side to that: large Chinese companies as potential acquirers of Western companies. We saw, for example, MicroPort acquire the total joint assets of Wright Medical. And I know one prominent European VC who’s spending a lot of time in China today because he expects that as the number of potential acquirers in the US has declined, Chinese companies will step up. When you think about Chinese companies, different than Chinese investors, do you see much appetite on their part for Western companies in an effort to be more global?

Yes. But generally speaking, it’s not in an effort to be global, but in the interest of acquiring technologies to bring to the China market. They are very eager to do so.

Q: What does the landscape look like in China in terms of large companies that might be potential acquirers? Companies like MindRay and MicroPort are well known, and today we learned about a new company, Blue Sail. Are there other large companies with the wherewithal to do deals for Western companies?

They’re very eager to acquire US companies and technologies because the valuations for Chinese companies are so high, they might as well buy a US company; it’ll be cheaper.

Oh yeah, there are a lot of big Chinese companies nowadays, and they’re coming to the States to acquire companies. For example, Weigao recently acquired privately-held Argon Medical Devices for $700 million, through a joint another company and paid almost $700 million for it. [Ed. Note—In September of 2017 Shandong Weigao Group Medical Polymer Co. acquired privately-held Argon Medical Devices Inc. for $850 million, through a joint venture with an un-named Chinese private equity firm, though in this case, Weigao explicitly said the deal was done to establish a platform for sales outside China.]

They’re very eager to acquire US companies and technologies because the valuations for Chinese companies are so high, they might as well buy a US company; it’ll be cheaper. Chinese companies are very expensive today, because of the supply and demand; nobody wants to touch them.

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